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What is tax withholding?

Key takeaways

  • Tax withholding, or withholding tax, is how much your company takes out of your paycheck to cover what it expects you'll owe in income taxes.
  • Withholding taxes can be for federal, state, or local income taxes.
  • Making sure your tax form W-4 is up to date can help ensure your tax withholding is correct and help prevent any surprises during tax season.

As almost anyone who's received their first paycheck is fully aware, the amount of money you take home can look very different than the top-line amount you are owed for working during a specific pay period. That's because there are deductions—many in the form of required tax payments—that are subtracted from your pay before it hits your bank account.

Understanding how and why taxes are withheld from your paycheck can help you make the best decisions about managing your income. Here's what you need to know.

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What is tax withholding?

Tax withholding, also known as withholding tax, is the amount of money your employer preemptively redirects on your behalf from your earned income to state, local, and federal governments. Because the federal government, most states, and some local governments tax workers' income, tax withholding allows you to spread out your tax payments over the year instead of making a large, single payment.

Why are taxes withheld from your paycheck?

The US income tax system is pay-as-you-go, meaning you pay taxes on most of your income as you earn it to support governmental services like Social Security and Medicare, public education, law enforcement, and federal agencies, to name a few.

For those working for a company that required you to fill out a W-4 form, your employer handles withholding the taxes you're expected to owe. These are then reported on a Form W-2 for you at the end of the year that you should use when completing your tax return. If you don't have an employer that does this for you—for example, if you're a freelancer or contract worker—you may be responsible for what are called estimated quarterly tax payments.

Not only does tax withholding prevent you from having to pay one massive tax bill at once, but it also can help you avoid penalties and interest payments for paying too little in taxes earlier in the year.

What is federal tax withholding?

The amount you may have withheld for federal taxes from each paycheck is based on the total amount you're expected to owe in federal taxes (think: income, Social Security, and Medicare taxes), as well as how you answer questions on your W-4.

Federal income tax

Your federal income tax withholding depends on what tax bracket your income places you in. Tax backets range from 10% to 37%, with higher incomes paying increasingly larger percentages. (If you need a refresher on how tax brackets work, check out our guide.)

Social Security and Medicare taxes (aka FICA)

Social Security and Medicare tax withholding are usually listed together as FICA on your pay stub. Your Social Security tax—which you may also see labeled as OASDI for Old-Age, Survivors, and Disability Insurance—withholds 6.2% of all of your income up to $160,200 for income earned in 2023 and $168,600 for income earned in 2024.

Medicare tax withholding is set at a flat rate of 1.45% of your income with no ceiling. However, if you earn more than $125,000 if you're married filing separately, $250,000 as a joint filer, or $200,000 for all other taxpayers, your employer will withhold an additional 0.9% of your wages that are in excess of those amounts for Medicare.

If you are self-employed, you are responsible for withholding additional amounts, bringing the withholding to 12.4% total for Social Security taxes (on income earned up to the annual limits) and 2.9% for Medicare—plus the extra 0.9% as applicable. Employers are responsible for contributing these additional amounts when you're a W-2 employee.

Your answers on your W-4

Your W-4 is designed to provide your employer with your best guess about what your federal income tax liability will be for the year. It does this by asking for information about your family, income you earn from sources other than your W-2 job, and potential deductions you might claim that could impact your withholding. Based on how you respond, your employer might withhold more or less of your income.

For example, if you earn income from side jobs, you might include an estimation of how much you expect to make from them. Then, your employer knows to withhold more from your checks each pay period, hopefully helping you avoid a big tax bill later to account for your side hustle earnings. On the other hand, if you note on your W-4 that you plan to claim dependents on your tax return, this might lower the amount your company withholds from your check.

If you anticipate your W-4 might be complicated, consider speaking with a tax professional, as withholding too little can result in fines and penalties. Keep in mind you can also update your W-4 as your life and financial situation change, which we explain below.

What is state or local tax withholding?

State and local income taxes may also be withheld from your paycheck, though the exact amount depends on where you live and work.

To find out the withholding you can expect from your state government, visit the IRS's directory of state tax information. You might also be subject to local taxes, so be sure to check any city or municipality income taxes that might apply.

How to calculate tax withholding

It can be hard to estimate how much in taxes should be taken out of your paycheck on your own. To help you get a ballpark idea, consider using the IRS's tax withholding estimator. To use the calculator, you'll need information about your earnings and your most recent tax return.

What do you do if not enough taxes are withheld from your paycheck?

A fatter paycheck might feel nice in the short term, but not having enough taxes withheld can come back to bite. That's not only because it means you'll owe the taxes you haven't paid yet—but you might also owe penalties or interest, which can be upwards of 5% of your unpaid taxes plus interest. (Read more in our guide on what happens if you don't file taxes.)

You're typically able to avoid these penalties if you owe less than $1,000 when you file your return or if you paid the smaller of at least 90% of the taxes for the tax year in question or 100% of your taxes for the prior tax year (110% for high earners).

If you realize you're underpaying your taxes, you can correct this error by updating your anticipated income and/or requesting extra withholding on your W-4 at any time during the tax year. If the IRS determines that you are not having enough money withheld to cover your taxes, it may issue a lock-in letter to your employer that requires your company to increase withholding.

On the flip side, you might realize at some point that you're overwithholding. Update your W-4 in this situation too. Leaving it as is won't cost you penalties or interest, but it means you won't get to benefit from that money in your bank account until you receive it as a tax refund.

Is anyone exempt from withholding taxes?

Some employees are exempt from tax withholding. To qualify for an exemption, you must have owed nothing in taxes the last tax year and must anticipate that being the case for this current tax year as well.

How to change your tax withholding

You can change your withholding by filling out a new form W-4 for your employer. You might want to update your W-4 after you experience a major life event, like marriage, divorce, or a change in the number of children or dependents in your family. The following adjustments might affect your withholding.

  • Your filing status
  • Number of dependents you claim
  • Amount of unearned income (from dividends, interest, or retirement income)
  • Your deductions and credits

Contact your company's HR or payroll team for more information on submitting a revised W-4. Changes on revised W-4s might take 1-2 pay cycles to go into effect, but they must be applied by the start of the first pay period on or after 30 days once a company received it, provided the changes don't conflict with a lock-in letter.

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